Event economics: faster, higher, stronger…

Jason Murphy

Publisher, Thomas the Think Engine

The Olympic flame has burned bright in Pyeongchang for a fortnight amid the 2018 Winter Games but the bill for the two weeks of ski, skate and slide will last for years afterward. The Republic of Korea is estimated to have spent many billions of its currency, the won, on the games. Will it have been worth it?

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Whether the event in question is a modest film festival, a Formula One Grand Prix or a giant global event like the Olympics or World Cup, the question host cities must ask is ‘is it worth it?’

"Whether a modest film festival, a Formula One Grand Prix or a World Cup, the question host cities must ask is ‘is it worth it?"

Host cities can find dozens of well-reputed consultancies willing to answer this question in the affirmative. Many gigabytes worth of officially commissioned reports still linger online, outlining the tremendous economic advantages of events to cities.

In these beautifully illustrated reports are very large numbers. They speak of gargantuan sums - billions of dollars worth of economic upside, in the form of jobs created, tourism attracted, free publicity gained, and infrastructure built.

A report on the London 2012 Olympics holds a likely record for the largest expected upside. It forecast a value to the UK of £16.5 billion over 12 years, based largely on expected new construction.

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One cannot expect such a record to stand for long. Paid by a city which has already hosted the event - or at least decided to - the consultants have every incentive to generate the largest sums they can.

Broken windows

If a child breaks a window there appears to be an economic benefit: a glazier is paid and feeds their family. Money flows through the economy. But is breaking windows good for the economy?

This is the so-called parable of the broken window, introduced by 19th century French economic philosopher Frédéric Bastiât.

Bastiat’s point is we cannot observe where the money would have been spent otherwise. We don’t see the cobblers and store owners who might have gained work instead.

We certainly don’t see the extra happiness the window’s owner might’ve gained from choosing to buy a new pair of shoes in lieu of simply continuing to have a window.

Even if an Olympics seems to have a positive effect, it is impossible to tell if that is the best that could have been obtained with the money. Nobody publishes estimates of benefits of money spent on mundane matters by Madrid, Moscow, New York or Paris after their 2012 Olympic bids failed.

Buying urban renewal or transport investment by hosting a sporting event seems an indirect way to get the advantages of those investments. In a 2012 paper entitled Economic Impacts of the Olympic Games through State Comparison, Samantha Edds concludes the economic benefits of the 1992, 1996 and 2000 games was all but imperceptible - and possibly negative.

“Investing in projects other than the Olympics may bring more people to visit and move into the area,” she wrote.

KPMG’S CGE MODELLING, 2006 Commonwealth Games

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Benefits are front-loaded to the construction phase but fade away. Is the effect of building for a sporting event better than building for any other reason?

Input equals output

There is a well-known and simple way to calculate the economic effect of hosting an event called input-output modelling. This approach generally creates the largest sums and often does it essentially by valuing broken windows at replacement cost.

The Auditor-General of the state of Victoria has politely described using input-output modelling as “not appropriate for assessing the economic impact of major events”.

Adding in indirect benefits (like encouraging people to do sport) and multiplier effects (accounting for money spent being re-spent by other people) is another sure-fire way to engineer a higher number.

A more-sophisticated approach to modelling the value of events is the use of computable general equilibrium (CGE) modelling.

This tries to capture only the additional value of an event to the economy. It basically runs a computer model of the economy twice – once with the event in it and once without.

A good example of such a CGE model is one operated by economic consultancy Ernst & Young to measure the economic upside of the Australian Formula One Grand Prix.

That exercise found the gross state product of Victoria would rise by around $A35 million if the Grand Prix was held but private consumption by Victorians would fall by $A16 million.

In an economy worth many hundreds of billions of dollars a year the effects are essentially indistinguishable from zero and smaller than the subsidy traditionally provided by the taxpayer to host the race.

While CGE modelling has its advantages, it still suffers from the temptations which bedevil any model – a skilled user of the model may obtain mot any result they desire by tweaking the assumptions.

Going once, going twice

At the Olympic Games hosting costs are out of control, according to Andrew Zimbalist, economist at Smith College in Massachusetts author of a book on the economics of the Olympics.

“The costs of hosting, properly accounted, can be expected to top $US15 billion for the Summer Games, while generating revenues in the $US3 billion to $US5 billion range for the host city” Zimbalist argues in the Milken Review 2018.

That combined with a rising awareness benefits are illusory is having a deleterious effect, he writes.

“The number of applicants fell from 12 in 1997 for the 2004 Summer Games to five in 2013 for the 2020 Summer Games, and from nine in 1995 for the 2002 Winter Games to three in 2011 for the 2018 Winter Games,” Zimbalist says.

For the 2024 Games, five cities expressed interest but three pulled out. Budapest only did so after a popular revolt over the cost and perceived opportunities for corruption.

That left the IOC with two choices for 2024 – Paris and Los Angeles. Perhaps fearing even fewer bids the next time, it chose to deny neither city the chance to host and allocated the 2028 games to LA in an unprecedented break with practice.

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“If Paris won 2024 and Los Angeles lost, then the IOC would face the very real possibility that it would later hold its auction for 2028 and no city would step forward,” Zimbalist wrote.

One suggestion is the IOC could reduce the cost by agreeing to accept a share of the cost of hosting. That would give it an incentive to choose something other than the grandest bid.

If you imagine the IOC as selling the Olympics you see than it can operate like a monopoly which extracts a high price. The price is paid in the form of expensive and impressive bids.

Formula One and a handful of other powerful organising committees can do something similar (FIFA, unlike the IOC, covers the cost of its own tournaments, historically extracting some of its rents in a rather less-visible way than by demanding gleaming new stadia).

Similarly, online retailer Amazon is able to extract expensive promises from US cities in it search for a location for a second headquarters.

The price of everything and the value of nothing

Now we have dealt adequately with the idea large events easily and regularly pay for themselves it is worth considering whether they must.

The idea hosting an event like the Olympics is an investment in an economy’s productive capacity is a fairly new one.

A product of its era – the first estimate of the economic impact of a major sporting event known to this author is a 1985 review of the Adelaide Formula One Grand Prix - it just might be utterly wrong-headed.

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Not everything important can be measured and not everything which can be measured is important. As societies have known since Rome, it’s not all about bread. Sometimes you need circuses.

Economists, undaunted as ever, have tried to measure these ephemeral effects too. The Euro 1996 football tournament was estimated to have lifted the happiness of UK residents by the same amount as if they had received a gift of 165 pounds. Is that true? Was it worth it?

We can never truly be sure.

Jason Murphy publishes Thomas the Think Engine and is a former writer for The Australian Financial Review.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.